Business Transaction
any financial event that changes the resources of a firm
Ex: purchase, sales, payments, receipts of cash
Steps to analyze the effect of a business transaction
- Describe the financial event (identify property, identify owner of property, determine the amount of increase or decrease)
- Make sure the equation is in balance
Business Equation
Property = Financial Interest
Cash = Capital
Cash = creditors claims + owners claims
Invested cash = increased equity
Cash + Equipment = AP + Capital
Equity
an owners financial interest in a business
Capital
Financial investment in a business, equity
On Account
an arrangement to allow payment at a later date, also called a charge-account or open-account credit
Accounts Payable
amounts a business must pay in the future
Creditors
the companies or individuals to whom the amounts of AP are owed to
Balance Sheet
- Statement of financial position
- a formal report of a business financial condition on a certain date
- reports the assets, liabilities, and owners equity
- shows firms financial position on a given date
- shows the amount and types of property the business owns, the amount owed to creditors, and the owners interest
Assets
property owned by a business
- cash
- A/R
- supplies
- prepaid rent
- equipment
Liabilties
Debts or obligations of a business
- A/P
Owner’s equity
- the financial interested of the owner of a business
- proprietorship
- net worth
Fundamental Accounting equation
assets = liabiltieis + equity
Revenue (income)
an inflow of money or other assets that results from the sales of goods or services or from the use of money or property; also called income
Expense
an outflow of cash, use of other assets, or incurring of a liability
- costs of materials, labor, supplies, services used to produce revenue
- decrease owners equity
Accounts Recievable
claims for future collection from customers
- an asset
Withdrawls
funds taken from the business by the owner for personal use
- decrease owners equity
Financial Statements
reports that summarize a firms financial affairs
- BS: snapshot of financial position
- IS: like a movie, shows the results of business operations over a period of time
- the amount of profit or loss
- assets on hand
- amount owed to creditors
- amount of owners equity
Income Statement
formal report of business operations covering a specific period of time; also called a profit and loss statement or a statement of income and expenses
- shows revenue earned and expenses incurred
net income
the result of excess revenue over expenses
Revenue > Expenses
net loss
the result of an excess of expenses over revenue
Revenue < Expenses
break even
a point at which revenue equals expenses
3 Line heading of an income statement
who, what , when
who - the business name
what - the report title
when - the period
Rules of single and double lines
single line: shows the amount above it are being added or subtracted
double line: used under the final amount in a column
